Digital finance and corporate financial fraud

Corporate financial fraud harms the interests of investors and affects the healthy development of the capital market. Understanding corporate financial fraud has important academic value and practical significance. Digital finance been rapidly developing over the past few years and scholars are investigating strategies for using digital finance as a tool to curb corporate financial fraud. This paper empirically examines the direct effect, intrinsic mechanism, and heterogeneous effect of digital finance on corporate financial fraud based on panel data of A-share listed corporations in China from 2011 to 2020. Results show that digital finance significantly inhibits corporate financial fraud. The breadth of coverage and depth of usage within digital finance show inhibitory effects on corporate financial fraud. This suggests that a combination of coverage and depth is needed to improve the success of digital finance on corporate financial fraud. The internal mechanisms suggest that digital finance inhibits corporate financial fraud by alleviating financing constraints, reducing corporate leverage, and decreasing agency costs. The heterogeneity analysis shows digital finance has a greater inhibitory effect for large-scale corporates, state-owned corporates, and corporates in areas with low degree of marketization. Our findings can provide reference for financial institutions, investors, analysts, and regulators to improve the quality of decision-making.

Automated summary

Corporate financial fraud causes harm to investors and has an impact on the healthy development of the capital market. Understanding corporate financial fraud is of both academic value and practical significance. This paper examines the direct effect, intrinsic mechanism, and heterogeneous effect of digital finance on corporate financial fraud in China based on panel data from 2011 to 2020. The results show that digital finance significantly inhibits corporate financial fraud, and the coverage and depth of its usage play a crucial role. The internal mechanisms indicate that digital finance suppresses corporate financial fraud by alleviating financing constraints, reducing corporate leverage, and decreasing agency costs. Moreover, the analysis reveals that the inhibitory effect of digital finance is more prominent for large-scale corporates, state-owned corporates, and corporates in less marketized areas.